Page 152 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-7: Recent Developments in Demand Theory

Consumer chooses combination of both specialities by evaluation of under change of uses within Notes
budget in respect of value and their interest. Value of consumer is shown neutral curve on specialities.
Neutral curve on special place of consumer and type of touch object within budget line. He will choose
coincidences of speciality where budget line or highest line touches neutral line. It is shown in Fig. 7.7

which touches XYZ budget line on point E units, neutral curve I between OB and OC object ray.
2
For knowing solid count of both specialities from point E to parallel to ray OC point F on ray OB a line
has drawn like this from line E parallel to ray OC on point G on OB has drawn a line consumer buys
micro combination of both speciality of both types of apple or brand B units points E forward from O to
F on ray OB and then buy units of brand C of F to E.

Like this, on other side, the macro combination of speciality of both brands for brand C point O to G and
for brand B, G to e can be obtained.
Same calculation comes out from both types by which consumer OF (= GE) brand B units and
units of brand C, OG (= FE). Similarly, consumer gets OK units of juiciness for brand B and KL

juiciness for brand C and OM units of sweetness from C and MN units for brand B.
It is important to note, that I cannot be on the neutral curve because this is below its budget boundary
1
xyz and he can buy only brand A in point x which according to assumption he has to buy combination
of two brands. Again, it cannot be on I curve because it is situated above its budget line XYZ, so it
3
maximizes its utility only on point E of I curve where this curve touches its budget line XYZ.
2
This speciality they describe like analysis of neutral curve for affecting of selection of brand of
commodity, changes in price, income and quality by consumer.

The price effect of law of demand

In Lancaster theory, change in price of brand of a commodity on demand to consumer and selection of
commodity on demand of consumer and selection of speciality can be explained.
Fall in Price: On given price of a brand or a commodity and income of consumer, suppose that consumer
is in equilibrium on point E in Fig. 7.8 where YZ part of budget line XYZ touches neutral curve I . It is
1
getting speciality OG (=FE) from brand C and OF (=GE) from brand B. Now price of brand B reduces,
on given income of consumer point Y of line OB shifts to Y in above by which a new budget line
1
XYZ becomes OXY Z is called probability area. New equilibrium is on point E where neutral curve I
1 1 2
touches Y Z part of this area. In result, consumer buy more OF quantity of brand B before it and brand
1
1
C, less quantity OG buy less as before. Lancaster says it efficiency effect which on reducing price of B,
1
change in combination of brand B and C. It is equal to substitution effect of neutral curve analysis except
it is for him is substitutions of speciality.

LOVELY PROFESSIONAL UNIVERSITY 145